Untapped Potential — Part 1

Via the Civitas Institute

In recent years, the microbrew industry in North Carolina has come into conflict with state regulations artificially limiting the growth of an otherwise booming business model. Specifically, North Carolina law mandates that a microbrewery may only distribute and sell its own beer if it sells less than 25,000 barrels of its own product per year. This cap on production by microbreweries serves as a boon to large-scale malt beverage producers and distributors. In this three-part series, I ask three questions. First, how did our legal system develop to where a statutory framework that blatantly favors one class of businesses over another is constitutionally permissible? Second, what does North Carolina’s system of microbrewery regulations look like, and why does it look that way? And third, do microbrewery operators have any possible avenues through which to challenge the current regulatory system as unconstitutional?

Part 1

It is 1934. The State of New York has established the “New York Milk Control Board,” which is empowered to regulate the price of milk. Pursuant to its legislative grant of power, the Board has issued a decree that, if a storekeeper buys milk from a “milk dealer,” i.e. a milk distributor, the storekeeper must pay higher prices and resell at lower prices than the dealer is permitted to pay or charge.

The law, obviously, works to the advantage of distributors and to the disadvantage of their competitors. And, predictably, distributors have quickly seen their profit margins grow, while storekeepers and consumers have taken a financial hit. The State’s rationale is that farmers are not making enough money, and they therefore need support from the State in the form of price controls, even if this effectively robs storekeepers of a portion of their profits.

One of these storekeepers, Leo Nebbia, has had enough. In defiance of the law, he sells two quarts of milk and a 5-cent loaf of bread for 18 cents. The State prosecutes him for a violation of the price regulation, and he is convicted. All lower courts uphold his conviction, and eventually Mr. Nebbia ends up before the United States Supreme Court.

The case – Nebbia v. New York – presents the Court with the question of whether the price regulation, and therefore Nebbia’s conviction, is constitutional. Can the state effectively take from one group and give to another via economic regulations, so long as it justifies such action as important for the public welfare?

In 1934, this question is contentious indeed. In a long line of cases, of which Lochner v. New York is the most well known, the Supreme Court has repeatedly held that the government has no place interfering in the economic relationships between buyers, sellers, and producers. Such interferences have repeatedly been declared unconstitutional under the due process clause of the Fourteenth Amendment. It is not the job of government, the thinking goes, to take from one group and give to another, no matter how altruistic the government’s motives might be. The state’s role is one of neutral arbiter, not balancer of scales.

But progressives have been consistently pressuring the Court to change this mindset. Their hope is to pass a wide range of economic regulation aimed at leveling the playing field and keeping certain groups from taking advantage of others through commerce, but to do so they need the Supreme Court to scale back its robust judicial review of economic regulation. And in 1934, these progressives win a major victory when Justice Owen Roberts changes his vote in Nebbia, making it a 5-4 decision in favor of the state.

“So far as the requirement of due process is concerned,” Roberts writes for the majority, “a state is free to adopt whatever economic policy may reasonably be deemed to promote public welfare, and to enforce that policy by legislation adapted to its purpose … If the laws passed are seen to have a reasonable relation to a proper legislative purpose, and are neither arbitrary nor discriminatory, the requirements of due process are satisfied.”

In Nebbia, the progressives had won their battle to regulate the economy for their chosen ends. The far more famous case of West Coast Hotel v. Parrish confirmed the Left’s victory three years later. Regulators were now free to interfere in the economy as they saw fit, so long as some rational motive could be offered. The most important takeaway is that if the Court could find any ostensibly rational reason for a regulation, then it had to uphold the law. Deference to the legislature had become the name of the constitutional game.

Not all were happy with this result. In his dissenting opinion, Justice James Clark McReynolds had a warning for his fellow justices:

The Legislature cannot lawfully destroy guaranteed rights of one man with the prime purpose of enriching another, even if for the moment, this may seem advantageous to the public. And the adoption of any ‘concept of jurisprudence’ which permits facile disregard of the Constitution as long interpreted and respected will inevitably lead to its destruction. Then, all rights will be subject to the caprice of the hour; government by stable laws will pass.

Fast-forward 80 years. Federal and state governments, free from the shackles of the early 20th century’s laissez-faire jurisprudence, regulate nearly every aspect of our economy. North Carolina alone has dozens of licensing boards that regulate trades from “animal breeder” to “cement finishing contractor” to “skin care specialist.” Despite consistent arguments by libertarians and conservatives that such economic regulation often produces few benefits for society while explicitly benefitting certain businesses over others, the courts have been effectively neutered in the realm of economic regulation. Challenging such laws as unconstitutional has become nearly impossible, notwithstanding rare outliers such as a line of cases striking down bans of unlicensed funeral casket production and another vindicating the economic rights of hair braiders.

And yet, it may be that the 21st Century has provided proponents of economic liberty in North Carolina with a new tool to make their case – the microbrew boom. Over the last ten years, North Carolina has seen a massive growth in microbreweries. Red Oak Brewery, Olde Mecklenburg Brewery, NoDa Brewing Company, and countless others have seemingly come out of nowhere to revolutionize the state of beer in the Old North State. The North Carolina microbrew movement has in fact grown to the point that it has come up against a new barrier – a state law that benefits distributors and large-scale producers at the expense of their competitors and consumers, under the guise of protecting the public welfare.

Sound familiar?

In Part 2, I’ll take a closer look at this North Carolina law in order to set the stage for an analysis of if and how it could be attacked on constitutional grounds.

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